The London Bullion Market is the collective activity of market making institutions in London who trade gold (and silver) on a principal to principal basis and on an institutional level. They also happen to be members of the London Bullion Market Association (LBMA), which is a trade association.
While the London Bullion Market is not a commodity exchange, its participants’ activities represent the largest Over the Counter (OTC) trading activity for gold bullion in the world.
The unit of account for settlement of gold transactions is the Ounce troy fine (a troy ounce of pure gold) contained in a London good delivery (LGD) bar.
A LGD gold bar must be at least 99.50% pure and must contain a minimum of 350 ounces troy of pure gold and a maximum of 430 ounces troy of pure gold.
In addition there are other specific requirements in relation to the weight multiples, dimensions and various marks to be stamped on such a bar. A gold bar with weights or dimensions or specifications other than the LGD requirements cannot be described as a LGD bar.
As these institutions are market making members of the LBMA, they are required by the LBMA rules on market making membership to respond quickly to requests for prices from other Market Makers, and consistently provide bid and ask prices in accordance with prevailing market conditions. The normal hours are from 8:00am until 5:00pm or, on days when the New York market is closed, until the PM LBMA Gold Price auction.
Transactions between members of the London Bullion Market tend to be in standard dealing amounts. Traditionally, bid and ask price quotations are said to be for up to a 5,000 ounces of gold.
However, when dealing with non-member clients, a market maker can provide a tailor-made service – offering quotes for variable quantities, qualities and types of material as well as for various value dates and delivery destinations. Thus, the London Bullion Market as an OTC market is said to be more flexible. It also provides confidentiality, as transactions are conducted solely between the two principals involved. This is said to be particularly important for central banks activity in the market.
Six members of the London Bullion Market provide loco-London “clearing” for gold via London Precious Metal Clearing Limited (LPMCL).
These are Barclays Bank PLC, Deutsche Bank A.G. (London Branch), HSBC Bank USA N.A. (London Branch), JPMorgan Chase Bank N.A. (London Branch), The Bank of Nova Scotia – ScotiaMocatta and UBS A.G. (London Branch) and they jointly own the LPMCL.
Three of the LPMCL clearing members also own their own bullion vaults.
These are Barclays, HSBC and JP Morgan.
These clearing institutions’ vaults act as “gatekeepers” by physically checking and weighing all new bars entering the London market. They ensure that the gold bars comply with the LBMA's “Good Delivery” specifications. Those gold bars which comply with standards are admitted and can be traded and moved within the London Bullion Market. Those which don’t are rejected. This gatekeeper role provides maintains the quality of gold bullion traded in London and its integrity in the worldwide gold bullion markets.
For the purposes of Financial Services and Markets Act 2000 (Recognition Requirement for Investment Exchanges and Clearing Houses) Regulations 2001, the London Bullion Market is neither a Recognised Investment Exchange nor a Recognised Clearing House.